this tax season, the IRS said it would add staff and technology to “reverse historically low audit rates” for high-income taxpayers.Filing season may have already begun stressful time For many people, while they need to move countless shapes and Putting all the right information together. The looming threat of an audit can make tax season even more stressful.
According to the IRS, an audit is simply an examination of an account to “ensure that information is correctly reported in accordance with tax law and to confirm that the amount of taxes reported is correct.”
Regardless of whether you fall into the category of high-net-worth individuals targeted by the IRS this year, your chances of being audited are still fairly low. Of the approximately 165 million returns received by the IRS in 2022, 626,204, or less than 0.4%, were audited.
Although federal tax return reviews can be initiated randomly, certain actions are more likely to be flagged than others. According to the IRS, an audit is determined by a “statistical formula” that compares your return to other taxpayers.Errors can raise warnings
Here are some common mistakes that lead to scrutiny from the IRS, and what you can do to avoid them.
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1. Return is incomplete
Joe Willetts, director of tax resources at Jackson Hewitt, told CNET, “While there is no single factor that automatically triggers an audit, document discrepancies are the most common reason you receive a letter from the IRS.” Told.
It can be something as simple as not filling out a form, “which often happens to people who are in a last-minute rush,” Willetts says.
The federal government offers a variety of credits, including the Child Tax Credit, which allows parents to claim up to $2,000 per qualifying child.
Mr Willetts said he would need to prove that he was legitimately eligible for these benefits.
“If you didn't claim the child tax credit last year and you claimed three children this year and they weren't infants, you're going to get a letter from the IRS,” she said.
That doesn't necessarily mean you made a mistake or are trying to defraud the government. You may have given birth to her child in May 2023, but the IRS is working on her 2022 return.
2. You made a mistake in your calculations or other information.
Simple miscalculations usually don't trigger a full-scale inspection by the IRS, but they do add extra scrutiny and slow the completion of your return. It's also possible to enter your social security number incorrectly, substitute a number in your address, or make other serious mistakes.
Electronic declaration Reduce this fraud by capturing more information from previous returns and allowing W-2s or 1099s to be loaded directly into the system.
Using a professional tax preparer is also a good bulwark against mistakes and miscalculations.
3. You are self-employed and have not reported your deductions accurately
“If you work for yourself and have legitimate business expenses, you should feel entitled to receive them,” says Lisa Green-Lewis, tax expert at TurboTax. “Make sure you have receipts and supporting documentation.”
If you claim the home office deduction, it must be a space used “exclusively and regularly for the purpose of your trade or business,” not your dining room table.
If you claim travel expenses, you must document the mileage you use for work. Deducting a personal car as 100% of his expenses raises red flags, Green-Lewis says.
Being diligent is especially true when it comes to business meal deductions. In 2021 and 2022, business meals could qualify for his 100% deduction, but now that limit has returned to 50%.
“But you need to document who you're with, what the purpose of the meeting was, the dates of the meals, etc.,” Green-Lewis says. “Of course, please keep your receipt.”
4. Claiming too many business expenses or losses
If you have income from a business, you must file a Schedule C form. However, it complicates filing and increases the likelihood of being contacted by the IRS.
Mr. Greene-Lewis is very diligent in asking taxpayers to claim all deductions that are legally available to them, while also providing details and supporting documentation to justify those deductions. is encouraged.
Generally speaking, the IRS algorithm looks for deductions that are above the norm for people in their specialty. So, if you are a patent attorney but your travel expenses are three times what the other patent attorney claims, that could lead to scrutiny.
If your business has been losing money for several years in a row, the IRS may want to make sure your business is healthy.
Small business owners who keep sloppy records often make frivolous deductions, said Thomas Scott, a tax partner at Aprio, a certified public accounting firm.
“When business owners calculate expenses and deductions, they tend to stand out,” Scott told CNET. “Under audit, the IRS requires support and proof of deductions, and if not provided, these deductions are disallowed.”
On a similar note, Scott added that “companies seeking to receive incentives or credits for which they are not eligible may raise red flags.”
5. Charitable deductions are extraordinarily large.
By itemizing your deductions, you can claim the value of donated cars, clothing, and other property, as well as cash donations to recognized charities. The IRS will let you know if these contributions don't seem to match your income.
The agency's computer program, the Identification Information Facility System, continuously scans returns for such anomalies.
“If you claim a charitable deduction equal to half of your income, that's what they're going to see,” Greene-Lewis told CNET.
The IRS places a cap on the amount of your adjusted gross income that can be deducted as a charitable contribution. Some forms of donation may exceed this limit, but doing so is likely to come under scrutiny, so it's a good idea to have all your documentation in order.
6. You have undeclared income.
This is important. Your employer must submit her W-2 to the IRS that reflects your income. If you are a freelancer or contractor, you must file a 1099 if your income exceeds $600.
The IRS automatically checks whether your reported income matches the income submitted by your boss. You'll also be notified of interest and earnings from savings accounts, investments, and stock trades, as well as large gambling wins, inheritances, and almost any other type of income.
Failure to report capital gains on virtual currency transactions may result in an audit.
Even if you work in a business that handles cash, such as as a waiter or babysitter, your unclaimed income can catch up.
“If someone is bringing a child to you to care for, they are likely charging your services on their taxes, so make sure everything is in line. We need to check,” Willets said. “Even a small business like a house painter is going to be asked for a bond, and that's going to end up going beyond his IRS window.”
Government agencies are talking to each other, she added. The flag is raised when she puts down $80,000 when applying for a Federal Housing Administration-backed mortgage, even though she reports $20,000 in income on her tax return.
Aprio's Thomas Scott says small business owners who don't keep proper records tend to underreport, creating a major audit risk.
“Business owners don't know their income throughout the year, so when it comes time to file taxes, they tend to make estimates,” Scott says. “The problem with this approach appears because most of the income earned is reported to the IRS on Form 1099. You can check it.”
As the IRS accepts reports from concerned citizens, it is increasingly likely that disgruntled employees or unjustified co-workers will be threatened, especially since the 2006 IRS Whistleblower Program increased incentives from 15% to 30% of earnings. may be willing to report you for tax fraud. The IRS will collect it.